No matter what industry you’re in and what you’re selling, the same factor applies: Buyers are trying to pay as little as possible, and sellers are trying to maximize their price. There are many things the seller of a dealership can do to increase its value, and there are certain things buyers can look for as indicators of hidden potential.
A valuation is often driven by trends. Below are six trends we’ve seen lately in dealership valuation:
Aging Ownership Population
One of the most significant trends in dealership valuation is the aging ownership population. Many dealership owners in the United States are over 70 years old. Succession is essential, whether it’s within a family or to an outside buyer. Sellers should start seriously considering their succession needs, including their goals for a sale. A valuation is a vital part of being able to set realistic, achievable goals in retirement. And with so many owners retiring over the next decade, the market is about to get flooded with dealerships that aren’t transitioning within a family, so this trend is an urgent one.
High Cost of Entering the Dealer Space
Not only do manufacturers tend to control who is approved to purchase a franchise; we’ve also seen the cost of buying a dealership continue to increase. Both factors are limiting the pool of new buyers, as well as potentially compounding the problem of an aging ownership population.
Manufacturers also control when franchise stores must remodel to follow a new brand look. Since these renovations are expensive and tend to happen quite frequently, it presents a further barrier to entry for potential new buyers and further reduces the buyer pool.
Location of the Dealership
Geography plays a role in the value of a dealership. There are areas of the U.S. that buy more domestic cars than imports, and vice versa. Some populations buy more pickup trucks and SUVs. What the general preferences of a specific geographic area are can factor into how valuable a dealership is (i.e., if it’s meeting these preferences rather than filling a more niche market).
Rural versus metro-located dealerships also factor into valuations. Rural dealerships sell fewer cars per month, but metro areas tend to have a higher dealership saturation. The market is larger and offers more opportunity, but if your dealership has a lot of competition, you’re fighting for market share. All of this plays a role in determining a dealership’s value.
We’ve seen customer satisfaction indexes (CSIs) play a larger role in valuations. Depending on how happy your customers are with your dealership’s service, a CSI can cause multiples to go up or down, determining if you can attract the right buyer. If you’re thinking of selling your dealership, consider ways you can improve customer satisfaction. This can include things like changing processes and giving employees and managers further training.
Public Dealer Groups
Three or four years ago, public dealer group stocks were trading up to 18x earnings. However, today that ratio has dropped below 10. For public companies, it’s all about growth, and dealerships are no exception. They want to continue expanding revenue and their bottom line to grow their stock price because if they are paying with stock, they have cheaper currency.
As mentioned above, publicly traded dealership groups have seen their stock prices and their P/E multiples bounce around. However, blue sky multiples have barely moved. This is despite changing tax laws, numbers of deals and buyers focused on return on investment (ROI). However, public dealership groups have an influence on valuations regardless of whether blue sky multiples have changed.
Return on Investment (ROI)
From a valuation perspective, the biggest factor for buyers continues to be ROI. If a buyer is going to invest a large amount of money into a franchise and go through the process of getting manufacturer approval, they want to be sure they can turn the store around if it’s underperforming or grow it and increase their ROI.
A great takeaway from this is that if you’re a seller of a store that’s underperforming, don’t be pessimistic about its value. A store like this brings a high multiple of earnings because a new buyer comes in with their own management and costs, so it’s starting with a lower multiple. We consistently see dealerships that are losing money gain value by attracting buyers who see the potential of what they can do with the store.
How to Value a Car Dealership
If you would like to discuss any of the trends we mentioned above or learn about how Wipfli can help you value your dealership, contact us today.